MNI ECB WATCH: ECB Holds, Says Will Have More Data In June

The European Central Bank left rates unchanged on Thursday for a seventh consecutive meeting, but pointed to its next Governing Council in June as offering more information about whether inflation risks and second-round effects from the Middle East conflict will require a hike in interest rates.

“We are bound to revisit the situation and then we will take the decision. Directionally I know where we are going, but there can be big changes,” ECB president Christine Lagarde told a news conference after being asked why the Governing Council chose to leave the Deposit Rate at 2% and keep other key rates also unchanged. (See RPT-MNI INTERVIEW: Pereira Says ECB Keeps Cool Head )

Lagarde said that the economy is “moving away from the baseline” scenario published in March, which incorporated two interest rate hikes. 

"What is critically important is the impact energy prices will have... We have made an informed and unanimous decision on insufficient data, and the debate must be revisited at the next policy meeting in six weeks’ time,” she said. (See MNI SOURCES: Ceasefire Reduces Urgency Of ECB Hike Talk)

The fact that the ECB is not yet seeing second-round effects allows some time to take stock of incoming information, Lagarde said.

"We are not seeing second-round effects. We are seeing direct effects, indirect effects but not second-round effects. We are receiving inconsistent information. There are no Intentions to significantly raise wages. Financial tightening is happening. For all these reasons, we want to give ourselves time,” she said.

Lagarde said that markets understand the ECB's reaction function well, and that this, along with a tightening of financial conditions, helps to give policymakers more time.

NO STAGFLATION

Lagarde pushed back against using the term stagflation to describe the economic impact of the closure of the Strait of Hormuz, saying that the situation was very different to that during the energy crisis in the 1970s.

“Now is a completely different situation. We don’t apply stagflation to the circumstances that we have,” she said.

Asked about the possibility of creating new tools or to use the balance sheet to manage the current circumstances, Lagarde said the Governing Council still believes that interest rates are the best tool available.